- S&P 500 and Dow Jones fail to move into positive territory despite Friday’s strong rally.
- With 85% of the S&P 500 companies reporting, 79% reported positive earnings surprises, but Q1 blended earnings show a decrease of 2.2% for the second consecutive quarter.
- Manufacturing showed improvement but remained in contraction territory for the sixth consecutive month, with the Manufacturing PMI registering 47.1%.
- Private-sector employment jumped by 296,000 in April, and the annual pay increased 6.7% year-over-year, while nonfarm payroll employment rose by 253,000 in April, and the unemployment rate slipped to 3.4%.
A strong rally on Friday was not enough to move the S&P 500 and the Dow Jones into positive territory for the week. Comments from the United States Fed Chairman Jerome Powell indicate that a pivot to cutting rates might take longer than market participants had hoped. Also weighing on the markets were comments from the Treasury Secretary Janet Yellen that the Treasury may be unable to meet its obligations as early as June 1. Technology continued to show strength, while oil prices fell by 7% in the week, causing more damage to the sector that is already under pressure this year. The TSX ended the week modestly lower, and the ECB raised rates by 25 basis points in Europe, causing the major indices to finish the week mixed.
As reported by FactSet, with 85% of the S&P 500 companies reporting actual results, 79% reported positive earnings surprises, and 75% of the reporting companies had positive revenue surprises. The blended (companies that have reported and estimates for those yet to report) earnings decline for Q1 is -2.2%. If this holds, it will be the second consecutive quarter that the index has reported a decrease in earnings. As of March 31, the estimated earnings decline for Q1 is -6.7%. Of those companies providing earnings guidance, 35 have issued positive guidance, while 44 have issued negative guidance1.
On Monday, the ISM reported for April that manufacturing showed improvement over the previous month but remained in contraction territory for the sixth consecutive month. Overall, the manufacturing PMI for April registered 47.1% – 0.8 percentage points higher than March. While improving to 45.7%, the U.S. ISM Manufacturing New Orders Index remained in contraction territory, as did the Production Index (48.9%). The Backlog of Orders Index fell by 0.8 to 43.1%, the Supplier Deliveries Index decreased by 0.2 to 44.6% (the lowest reading since March 2009) and the Inventories Index dropped by 1.2 percentage points to 46.3%. Export Orders increased by 2.2 percentage points to 49.2, and the Import Index jumped 2 percentage points but remained in contraction territory at 49.2. A number lower than 50 indicates a contracting economy, and over 50 designates an expanding economy2.
On Tuesday, U.S. Department of Labor reported job openings fell to a two-year low of 9.6 million. The number of people quitting jobs also slipped to 3.9 million. The rate of quits in percentage terms is down to 2.7% from a high of 3.3%. One of the fears of the Federal Reserve is that tightness in the labor market will continue to put upward pressure on wages3.
On Tuesday, the U.S. Department of Commerce reported that orders for manufactured goods rose 0.9% in March, following two months of declines. Orders, stripping out orders for commercial aircraft, were down 0.7%. Durable goods jumped 3.2% in March, along with smaller increases in shipments (1.1%) and unfilled orders (0.4%). Inventories of manufactured durable goods decreased by 0.9% – down two of the last three months4.
The payroll processor ADP reported, on Wednesday, that private-sector employment jumped by 296,000 in April, and annual pay increased 6.7% year-over-year. The most significant gains in employment were in leisure and hospitality (154,000), followed by education and health care (69,000). On the other hand, manufacturing lost (38,000), followed by financial services (28,000)5.
The Federal Reserve concluded two days of meetings and announced the much expected 25 basis point rate. Most significantly, the Fed, in the statement following the meeting, reworked the language regarding future rate increases by deleting “some” additional hikes “may” be needed. The Fed said future hikes would be dictated by “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments.” Further, the Fed Chairman stated in the following news conference: “We remain committed to bringing inflation back down to our 2% goal and to keep longer-term inflation expectations well-anchored. Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the long run.” We believe this likely signals a recession in the coming months6.
On Thursday, hinting that labor market conditions might be easing, workers filing for unemployment benefits rose by 12,000 to 242,000 for the week ending April 5. The total number of continuing claims from all benefit programs for the week ending April 15 decreased from 36,249 to 1,779,2497. On Friday, the Bureau of Labor Statistics reported that nonfarm payroll employment rose by 253,000 in April, and the unemployment rate slipped to 3.4%. Employment increased in professional and business services, health care, leisure and hospitalit and social assistance8. It should be noted the difference between the government employment report and the ADP report is that the government report includes government payrolls, whereas the ADP does not.
By almost all metrics, economic activity is slowing. As a result, some view the U.S. central bank rate increases of the last year as in the rear-view mirror and that a new bull market is just around the corner. However, while some optimism may be warranted, too many possible headwinds could derail any significant market advance.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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